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Australia cuts rates more than expected, currency tumbles

Tuesday 4th November 2008

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The Reserve Bank of Australia cut its benchmark rate a greater-than-expected 75 basis points, citing deteriorating international conditions and falling commodity prices.

The RBA lowered the cash rate to 5.25% from 6%, its third consecutive cut. Last month it slashed the rate 100 basis points to 6%. Australia's dollar fell as low as 66.55 U.S. cents from 67.15 cents immediately before the statement. The S&P/ASXC 200 Index pared an earlier decline.

"International economic data have continued to point to significant weakness in the major industrial economies, and there have been further signs that China and other parts of the developing world are slowing as well," Governor Glenn Stevens said in a statement. "These conditions have contributed to further falls in world commodity prices."

Global demand for raw materials, especially in booming economies such as China's, has helped fuel economic growth in Australia, which produces iron ore, coal and natural gas. China's economic slowdown is worsening and probably won't pick up in 2009, Tom Albanese, chief executive of Rio Tinto, said this week. China buys 17% of the company's output.

Australia's economy grew 0.3% in the second quarter, the weakest in more than three years, and some economists say the nation may sink into recession, along with the U.S., the U.K. and the European Union.

Central banks around the world have slashed borrowing costs to try to thaw credit markets and help stem the global economy's slide. The European Central Bank and the Bank of England may cut interest rates again as soon as this week. The RBA was expected to cut its target rate by 50 basis points, according to the consensus in a Reuters survey.

"On balance, it appears likely that spending and activity will be weaker than earlier expected," Stevens said today.

By Jonathan Underhill



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